When reading your credit report, you may come across terms that are strange or unfamiliar. But, in a broad sense, we want you to think of your credit report as the story behind your credit score. To construct a credit score – and quantity your creditworthiness as a borrower – credit bureaus use algorithms that utilize input variables to construct a total score. For example, a credit bureau may employ 10 variables in its scoring model – each with a maximum score of 100. If your credit habits score near the top for each one, the result is a high overall credit score. But keep in mind, though, some variables are weighted more heavily the others. This way, credit bureaus ensure the most important metrics are used to tell your story.
To that point, Equifax – one of the largest credit reporting agencies in the country – says the main variables used to calculate your credit score are:
- Your payment history.
- The amount of credit you use relative to your available limit.
- The length of your credit history.
- The number of credit inquiries into your file.
- Various public records.
How Often Should You Monitor Your Credit Report?
According to the Consumer Financial Protection Bureau (CFPB), you should monitor your credit report at least once per year. Moreover, you should analyze your report before any major credit purchase before applying for a new job. Considering many companies assess your credit report before making their final decision, your information must be accurate and up-to-date.
From our perspective, analyzing your credit report more often will help you understand how your financial behavior affects your credit score. Staying tuned in allows you to assess whether your recent activity makes you more or less attractive in the eyes of lenders.
Another important reason is to catch reporting errors. Often, credit bureaus make mistakes that can result in an uphill battle to rectify in the future if you let them linger.
Last – and arguable most important – is to protect against identity theft. By monitoring your credit report, you can often ensure that your personal information is safe and not used to commit fraud.
For more information on how often you should monitor your credit report, check out the top reasons why you should stay up to date on your credit report.
Understanding Credit Report Jargon
Before we dive into the most important sections of your credit report, we want to define some common terms you’ll encounter along the way. Credit bureaus use much financial jargon that may be confusing, so familiarizing yourself with these terms will help you analyze the full report better.
- Account. As a generic term, an account represents any credit or financing agreement you’ve entered into – things like your mortgage, car loan, student loan, credit card, or cell phone plan.
- Account Number. This is the identification number assigned to you by the account provider. However, if the debt is managed by or sold to a third-party vendor, it will use its own account number.
- Account Review. This is when a creditor pulls your file to assess your financial health. Lenders do this to ensure you can maintain the terms of their agreement and assess whether you’ve taken on any new debt commitments. Regarding credit cards, lenders use account reviews to re-evaluate your current agreement and determine whether a credit limit increase/decrease or APR increase/decrease is appropriate.
- Account History. This provides information on your recent account activity.
- Account Type. Credit bureaus can use both letters and words to label an account. For example, installment loans can be labeled as ‘I,’ while revolving or credit card accounts can be labeled as ‘R.’ As well, lines of credit can also be labeled as ‘O’. On the flip side, some accounts may use an entire word. For example, your student loan account can be labeled as ‘Education.’
- Active and Inactive Accounts. When an account is active, it means a creditor has reported information to the credit bureau within the last 90 days. If not, the account will be labeled as inactive.
- Account Balance. This defines the amount of money you currently owe on each account.
- Account Limit. This outlines the amount of money owed on an installment loan or the credit limit on your revolving debt. Regarding credit cards, bureaus use this information to monitor your credit card utilization rate and see if it stays below 30%.
Understand Your Account Statuses
When combing through your credit report, you’ll also notice each account has a particular status. According to the Fair Isaac Corporation (FICO), this is an important thing to be monitored because status inaccuracy is one of the most common credit reporting errors.
- Open. The means the account is active and currently in use.
- Closed. This means the account is no longer in use.
- Paid. This means the account has been paid in full.
- Charged Off. This means the account ran delinquent for too long and was sold to a collections agency.
- Collection. This means the account has been charged off and is now being reported by a collections agency.
The Most Important Factors of Your Credit Report
Now that we’ve explained credit reporting jargon, we can move on to the five most important sections of your credit report. Here, you’ll encounter much of the information that’s used to calculate your credit score.
- Your Credit Summary. Providing a general conclusion of your overall borrowing behavior, your credit summary provides a broad look at your financial situation and consolidates all of your information into one place.
- Your Credit Accounts. Your credit accounts provide information on open and closed debt accounts, offering more insight into your borrowing behavior. It showed when you opened an account, your payment history, current balance when you closed an account, and much more.
- Recent Credit Inquiries. This section shows recent requests by lenders to pull your credit file. It can happen when you apply for a credit card, personal loan, or any other form of borrowing. An inquiry can also happen during a background check by a prospective employer.
- Negative Information. The negative feedback section outlines complaints made by creditors. Sometimes though, negative information can be consolidated with ‘public records.’ You’ll find items such as civil judgments, recent bankruptcy claims, and unpaid tax liens.
- Personal Information. Covering generic information like your phone number and mailing address, this section is mainly for identification purposes. Other information can include your Social Security number, employment information, and date of birth.
What are Debt Ratings, and How do They Work?
As a type of ranking or debt scoring, credit reports use the North American Standard Account Ratings System to label how well you service your debt. When you repay credit account balances, R-Ratings (for Canadian credit reports) and descriptive texts (for American credit reports) are used to determine whether or not the account is in good standing.
R-Ratings look like this:
- R00: This means the account is new, and there isn’t enough information to report.
- R1: This means the account is in good standing, and payments have been made within 30 days.
- R2: This means the account is past due but less than 60 days.
- R3: This means the account is past due by 60 to 90 days.
- R4: This means the account is past due by 90 and 120 days.
- R5: This means the account is past due by more than 120 days but has not been charged off.
- R6: This is not an appropriate rating term, and if you see it, there is an error.
- R7: This means the account is under a repayment agreement, and the funds are being repaid in installments.
- R8: This means the account has been closed because the item was either returned or repossessed.
- R9: This means the debt has been charged off and sent to a collections agency; it can also mean the contact information for the borrower is out of date. If you file for bankruptcy and your debts are discharged, your remaining debts are labeled with an R9 Rating.
What are Credit Alerts, and How do They Work?
Credit alerts help you find activities on your file. For example, you can use fraud alerts to help reduce the chance of becoming a victim of identity theft.
Common Credit Alerts
- 90-Day Fraud Alert. If you believe you’re a victim of fraud or identity theft, the CFPB recommends that you contact your credit reporting agency and open a fraud report. When done, all lenders who pull your credit file must verify your identity before taking any action. This includes: increasing your credit limit or adding a credit card. As well, when you place a fraud alert on your file, your credit reporting agency must notify all other major credit bureaus of the updated status.
- 7-Day Fraud Alert. If you’re a victim of identity theft, your reporting agency will place a 7-day fraud alert on your credit file. Doing so notifies all current and prospective creditors and instructs them to verify your identity before processing any new claims and watching out for suspicious activities.
- Activity Duty Alert. Designed specifically to protect military personnel while serving overseas, an active duty alert is free of charge and lasts for one year.
- Credit Freeze. While not technically an alert, a credit freeze allows you to prevent new lenders from accessing your credit file without your consent. Since the consumer administers a freeze, you have to instruct your credit bureau to enact it. However, the action is free of charge, and once you make the request, the bureau must fulfill the instruction within one business day. You can find the contact information for all major credit bureaus here, but keep in mind, administering a credit freeze will prevent you from registering for Medicare online.
What are Public Records?
Under the public records section of your credit report, you’ll encounter these types of judgments:
- Civil Judgments.
- Unpaid Tax Liens.
While negative claims like these can significantly damage your credit score, old entries hold less weight than new entries. If you’ve made some mistakes in the past but are taking steps to rebuild your credit habits – scoring algorithms will take this into effect.
Can You Remove a Bankruptcy from Your Credit Report?
While not an easy process, it is possible to remove a bankruptcy from your credit report. Before we get into the details, we need to outline the difference between chapter 7, chapter 11, and chapter 13 bankruptcy.
According to ModestMoney:
- Chapter 7 Bankruptcy is the most common form of bankruptcy and involves selling off assets to repay unsecured creditors. Afterward, the debt leftover is written off, and creditors usually end up with less than their principal.
- Chapter 11 Bankruptcy usually applies to businesses – but instead of liquidation – it involves reorganization of assets. This differs from chapter 7 bankruptcy because assets are not sold, and debts are not written-off. Instead, you work with creditors to develop a repayment plan.
- Chapter 13 Bankruptcy is like chapter 11 bankruptcy. However, it’s used by individuals and small businesses. Rather than liquidate assets to repay unsecured debts, a repayment plan is put in place so you can repay the proceeds in 3 to 5 years. To qualify for chapter 13 bankruptcy, you must convince the court you’re able to repay the unsecured debt within the allotted time frame. If not, you can be forced into chapter 11 or chapter 7 bankruptcy.
These definitions are important because there are legal limitations for how long each can stay on your credit report. According to Experian – a global leader in consumer and business credit reporting – chapter 13, bankruptcies are automatically removed from your credit report after seven years. Conversely, chapter 7 bankruptcies are automatically removed from your credit report after 10 years.
Now, to remove a bankruptcy claim before the time frames listed above, you need to present a compelling case. The first step is to check the court rulings for any inaccuracies regarding dates, dollar figures, or other mistakes regarding your ruling. Next, draft a dispute letter and send it to the credit bureau via certified mail. Include any relevant documents that support your case and flag any items that look suspicious.
While the credit bureau’s information is being processed, your credit report will label the bankruptcy as ‘in dispute.’ If victorious, the bankruptcy will be removed from your credit report. If not, you’ll have to wait for the above duration to expire.
What Other Information is Contained in Your Credit Report?
Beyond the information presented above, your credit report will also include general information regarding:
- How to dispute credit report errors.
- Explanations of your rights under the Fair Credit Reporting Act.
- Tips on how to combat identity theft.
- Your rights as a consumer according to state law.
As well, to ensure your credit report is always error-free, you can obtain a free report through AnnualCreditReport. The site is recommended by the CFPB and offers breakdowns from the three major credit bureaus – Equifax, Experian, and TransUnion.
What Should You Do if You Notice an Error in Your Credit Report?
You should report the error right away. Contact Equifax, Experian, and TransUnion to have them rectify the issue. It’s important to contact all three credit bureaus – not just one – because corrected mistakes aren’t always shared.
You have the right to dispute any perceived error on your credit report, regardless of how minor the infraction may seem. If proven correct, the error will be corrected and can result in a significant increase in your credit score. If the error requires you to draft a dispute letter, the CFPB has sample letters you can use as templates to help make the process easier.
How Common are Credit Report Errors?
According to the Federal Trade Commission (FTC), reporting errors are pretty widespread. Citing a 2013 study, the commission found that 25% of consumers had errors on their credit reports that impacted their credit score. Moreover, nearly 5% of consumers had more than a 25 point change in their credit score due to reporting errors, while 0.40% had more than 100 point change.
Also, 80% of consumers who filed disputes about credit report errors had the issue rectified somehow, while 10% of disputers saw a positive change in their credit score due to the correction.
While credit reports are filled with unfamiliar jargon and financial terms you don’t see daily, knowing how to read your credit report is the first step to understanding how creditors perceive your financial habits. Once equipped with this knowledge, you gain insight into what actions help or hurt your creditworthiness in the eyes of lenders. As well, reading your credit report allows you to stay on top of reporting errors. When caught quickly, they’re much easier to rectify. Last, reading your credit report allows you to fight back against identity theft. By constantly monitoring your credit report, you ensure your personal information is safe and not used for malicious intent.